How to pick stocks in an ugly market

Given the turbulent markets, cash may seem like the best place to be. But if you’re willing to take a little risk for a chance at higher returns, look for a dividend stock with a currency kicker.

What if you can't muster the optimism to buy beaten-up growth stocks today -- and yet you're not so pessimistic that you're out in the backyard burying gold? Over the weekend I started thinking about stocks that pay dividends, but in some currency other than dollars. It strikes me as an attractive combination.

You have to have a degree of long-term optimism to buy growth stocks during the current global sell-off. And maybe you don't right now -- what with the continuing euro debt crisis, the downgrade of U.S. debt to AA from AAA by Standard & Poor's, and stock market reaction Monday that had a whiff of panic. Quite possibly this doesn't feel like a time to be buying any of the stocks I picked in my Aug. 5, column, "10 go-go stocks for a no-grow world."

Maybe you can muster a degree of long-term optimism, but the short term looks very dark. And you're not sure how long that short term will last -- a few days or a few weeks?

In that case, sitting in cash feels like the right thing to do. Buy some gold? Gold topped $1,700 an ounce Monday morning on buying in Asia. It's probably still a good hedge -- if the next stop is $2,000, that's a 17% gain from here. But it's expensive and carries its own risk of a correction. Plus, it has the drawback of not paying any yield. Bonds? Certainly not U.S. Treasurys as everyone tries to figure out the ramifications of the U.S. downgrade.


Because I don't know how long current market conditions might last, I recommend you think about safety, certainly, but safety that pays a little bit. And that's led me to what I'm calling a safe, currency-enhanced dividend play.

For example, I've been thinking, a dividend yield of 3.47% on shares of DuPont (DD, news) looks attractive compared with the 2.34% yield on the 10-year U.S. Treasury. Sure, DuPont is rated just A for the long term by S&P. But that A looks a little better today than it looked when the U.S. was AAA just last Friday.


The one thing that troubles me about DuPont, though, is that this U.S.-based (but global) company does business and pays its dividends in dollars. When it comes to doing business around the world, a weak dollar that promises to become weaker still is a mixed blessing. It certainly gives a U.S. company a pricing edge against competitors that sell in stronger currencies. (I'd hate to be a chemical company selling its goods in Swiss francs right now, for example.) On the other hand, it also raises the cost of raw materials especially those that aren't priced in dollars. I don't think you can call a weaker dollar a plus or a minus for all U.S. companies. Which it is and how much depends on a specific company's mix of business.

But there's no doubt that, all else being equal, I'd prefer if DuPont paid me its dividend in something other than dollars. If the dollar continues to weaken, that dollar-denominated dividend stream will be worth a little less each day.

What would I prefer? Not euros or yen, certainly. But there are still strong currencies in the world. Swiss francs. Canadian and Australian dollars. The Swedish krona and the Norwegian krone. With each drop in the dollar, the euro or the yen, the value of dividend streams from companies doing business in these currencies increases to anyone collecting those dividends in a weak-currency country.

That's not to say that you should pile into just any strong-currency dividend stock. Remember that a strong currency is a mixed blessing for the company doing business in that currency. A Swedish manufacturer going head to head with a U.S. manufacturer is facing a competitor able to sell its goods for less to many customers every time the dollar falls. At the same time, the goods of the Swedish manufacturer get just a little more expensive to many customers every time the krona appreciates. If you want to see the damage that having to compete in a strong currency can do to companies, just take a look at the devastation in Brazil's goods exporting sector from the strong real.

So, again, you need to look at the pluses and minuses of a strong currency on any company. I like Nestlé (NSRGY, news), 3.42% yield paid in Swiss francs, for example. But I worry about the pressure a strong franc puts on the company's prices around the world. (The degree to which Nestlé produces its products locally mitigates some of the competitive disadvantages of a strong Swiss franc.)

So what would be my ideal strong-currency, dividend stock -- besides the obviously strong-currency bit, of course?

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